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A few years ago Ruffer was dubbed “50 Cent” for hoovering up Vix options priced at 50 cents — first making a mint in Volmageddon before amassing a $800mn haul when markets puked in 2020. Now it’s got a brand new bag.
The £24bn UK investment company’s chair Jonathan Ruffer wrote in his latest letter to investors that it has a “big position” in the Japanese yen, arguing that it will move “violently” higher at some point soon:
With currencies, it is always dangerous to try to anticipate a change of direction, even when the fundamentals cry out for it, and our performance has suffered accordingly. We believe the yen is oversold for technical reasons and that, when these dissipate, it is likely to move sharply higher. Moreover, when it does, it is likely to be concertinaed into a brisk uncontrollable move upwards. This happened, to our advantage, in 2008, and we believe that today’s backcloth will cause a repetition of that dynamic.
Alphaville included the letter in Further Reading last week, but wanted to revisit the subject because it is delightfully contrarian. In fact, Ruffer must so far be ruing its bet.
The Japanese yen recently drifted past 150 against the US dollar again before probably triggering likely Bank of Japan intervention. If it smashes past that mark again it will be at its weakest level versus the dollar since the Japanese bubble burst in the early 1990s.
In fact, the yen is not only comfortably the world’s worst performing major currency in 2023, it is the worst performer of ANY currency tracked by Bloomberg (this reminds me that we should probably write something about Nokkie as well soon).
However, to an extent Ruffer’s thesis is actually pretty mainstream. Here are the broad contours of what a lot of investors have been (eagerly) anticipating for more than a year:
After several attempts to cautiously fiddle around with its “yield curve control” policy the Bank of Japan will soon have to scrap it altogether. The current betting is that this is likely to happen next year, perhaps after the annual “Shunto” wage negotiations in March 2024, where Japan’s biggest labour union is now seeking ”at least” a 5 per cent pay increase.
The subsequent death of YCC will send Japanese government bond yields spiralling higher — removing the last anchor for global fixed income markets — and restore the yen’s vim.
Moreover, plenty of investors reckon that the unexpected global economic resilience to tighter monetary policy will finally end next year. That will throw interest rates into reverse, narrow the spread of other government bond market yields over Japan — whatever happens with YCC. On top of that, the yen is a classic ‘safe haven’ currency that tends to strengthen when markets are in a tailspin.
And there’s plenty of fuel for a rally, given that inflation-adjusted valuation gap between the US dollar and the Japanese yen is the most extreme in global currency markets, according to JP Morgan.
All these factors are why BCA’s chief global strategist Peter Berezin reckons that 2024 will be “the year of the yen”, arguing that “the stars are aligning in a way that could see the yen make significant gains”. Here are his main points:
— Global growth has firmed over the past few months, with US consumption remaining resilient, Chinese activity data surprising on the upside, and tentative signs of hope emerging from the latest ZEW survey in Europe.
— The global economy will stay buoyant over the next few quarters but will then sour as the lagged effects of higher interest rates and tighter bank lending standards work their way through the system, ultimately culminating in a recession in the second half of 2024.
— We see the yen as an excellent hedge against a global downturn. Not only is the currency more than 40% undervalued relative to its PPP exchange rate, but it will benefit from rate cuts by other central banks and the eventual dismantling of the BoJ’s Yield Curve Control framework.
— If all else fails, we see a heightened possibility that the authorities will intervene to support the yen if USD/ JPY were to rise much above the 150 mark.
To be fair, there are some weaknesses with this thesis. For example, if there is a global recession looming, why would the BoJ tighten monetary policy by scrapping YCC going into it? There’s plenty of geopolitical fear and loathing out there already, but the yen hasn’t caught any safe haven bid yet.
And not everyone is convinced that the yen is a smart bet. Going by CFTC data, hedge funds are still comfortably net short the yen — and have been since early 2021 (zoomable version).
However, Ruffer’s yen thesis has some twists to the mainstream one. For example, the money manager stresses that it has little to do with relative valuation, arguing that “holding the currency for a capital gain is, by itself, a poor one: in general, weak currencies go on getting weaker.”
Instead, it is about two technical forces — domestic and international — that it believes will supercharge the Japanese currency when it finally breaks the declining trend. Here’s Jonathan “Fiddy” Ruffer again, with Alphaville’s emphasis below:
Local demand for yen will come about in the aftermath of Bank of Japan Governor Ueda’s increasing isolation in trying to hold the yields of the government bonds well below the international rate. The most likely way out of this impasse is for the authorities to compel domestic institutions to acquire such bonds at their current (anomalously expensive) prices. To do this, those institutions will have to sell down big holdings of foreign government bonds, denominated, of course, in foreign currencies. Many of those holdings have already been hedged into yen, but much of it will still be held in local currencies, with the conversion into yen telescoped into a short time window.
The international constituency of forced sellers are those foreigners who have borrowed in yen to enjoy a lower interest rate regime than the one in which the assets are purchased. That constituency is more aware of the double advantage of a low interest rate and a steadily diminishing value of their borrowings than they are of the dangers of a currency mismatch which, at the key moment, moves sharply against them.
. . . In my experience, it is unusual to find two separate constituencies of forced buyers — to find a single one is enough. It is the strong possibility of an extraordinary upward move in the Japanese currency which provides us with the stamina to withstand the general day-to-day attrition of the yen. If the net result produces merely a satisfactory ultimate return, we will be disappointed.
Further reading
— The BoJ’s tightrope act
— Dissecting the big bad Japanese bond bid
